Big Oil isn’t as rich as everybody thinks

·6 min read

With inflation crimping family budgets, some politicians want to punish the big companies cashing in. So naturally, they’re targeting tech firms, banks and pharmaceutical companies.

Oh wait, that’s not who they’re targeting. Instead, they’re arguing that oil and gas firms should generate more product for less profit and maybe pay a “windfall tax,” with the proceeds going to overburdened motorists.

“Oil companies are #RippingOffAmericans,” the House Energy Committee, controlled by Democrats, tweeted before an April 6 hearing with six energy CEOs. “They are reaping record profits and using them to the benefit of shareholders rather than increasing production to lower prices at the pump.”

Only thing is, U.S. energy companies have been among the least profitable firms during the last 10 years, and they’re not the most profitable now, even with oil prices up 60% during the last 12 months, to nearly $100 per barrel.

In 2021, U.S. energy firms were the 10th most profitable sector of the U.S. economy out of 11, according to S&P Global IQ. Energy firms listed in the S&P 500 stock index posted an 8.3% profit margin in 2021. That was below the median for all 11 sectors, which was 10.6%. Financials led with a 25.3% profit margin. Tech was second at 23.2%. Pharmaceutical firms posted a 23.1% margin. The only segment worse than energy was consumer staples, with a 6.6% margin.

Forecasts for 2022 are similar, with energy likely to post an 8.1% margin, according to analysts polled by Capital IQ. The 2022 forecast is 31.9% for Big Pharma, 25.2% for tech and 19.8% for banks.

As for the big oil and gas companies politicians love to hate the most, Exxon posted an 8.3% profit margin in 2021, with the forecast for 2022 at 10%. Chevron’s margin was 10% in 2021, with a forecast for 11.8% this year. ConocoPhillips was most profitable, with a 17.3% margin in 2021 and an estimated 22.6% margin in 2022.

Why Big Oil is a punching bag

Apple bested all of those firms, with a 26.6% profit margin last year. Drug giant Pfizer did too, with a 27% profit margin. Citigroup, same, with a 29.3% profit margin.

[See 5 myths about oil and gas prices.]

Nobody’s demanding that Apple, Pfizer or Citi pay a windfall profits tax, even though they’re among the most profitable U.S. companies year after year. Big Oil is the punching bag for familiar and obvious reasons: Gas prices well above $4 per gallon are pounding drivers, and everybody wants a villain. By the nature of their business model, oil firms earn more when the cost of the raw material they provide goes up. That’s because they make long-term fixed investments to extract and process oil that are more profitable when the mineral itself is more valuable, and less profitable when that value falls. So oil firms prosper in inverse proportion to consumers, making them a perennial bogeyman.

U.S. Senator Dan Sullivan (R-AK) speaks in front of a photo of a gas pump display featuring a sticker of U.S. President Joe Biden, during a press conference about high gas prices for consumers at the U.S. Capitol in Washington, U.S., April 6, 2022. REUTERS/Elizabeth Frantz
U.S. Senator Dan Sullivan (R-AK) speaks in front of a photo of a gas pump display featuring a sticker of U.S. President Joe Biden, during a press conference about high gas prices for consumers at the U.S. Capitol in Washington, U.S., April 6, 2022. REUTERS/Elizabeth Frantz

The oil companies’ many critics point out that these dastardly profiteers have been raising dividends and increasing stock buybacks as oil and gas prices have been going up, even during Russia’s barbaric invasion of Ukraine. A trio of nonprofit groups recently analyzed the financial statements of 20 large energy firms and found widespread evidence the firms are returning profits to shareholders instead investing in more production. One of the report’s authors told The Washington Post the companies’ performance during the past year has been “a master class in war profiteering.” The group’s recommendations include a Big Oil windfall tax that would rebate up to $45 billion to consumers and a new 1% tax on stock buybacks meant to discourage the practice.

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It's true that energy companies have been profitable recently. But that follows several disastrous years that drove many energy firms out of business and left others bleeding cash. Exxon, for instance, notched a profit of $23.6 billion last year. But that followed a gargantuan loss of $22.4 billion in 2020, a year when oil prices crashed so hard they briefly turned negative. Apple, by comparison, earned $94.7 billion in 2021, more than three times Exxon’s profit—and that came after an unbroken string of 11-figure profits going all the way back to 2010.

The U.S. fracking revolution led to a huge increase in U.S. oil and natural gas production during the last decade—and low oil prices that wrecked the financial performance of many drillers. Yahoo Finance has previously shown that for the decade from 2012-2021, energy stocks had the lowest average annual return of any sector, by far, averaging an annual gain of just 0.85%. The next worst performing sector was utilities, with a 7.6% return. Tech led with a 23.3% return.

Here's another way of looking at it. The energy sector did have the best performance of any industry in 2021, with an average stock gain of 58.5%. But the energy sector’s total 10-year gain is a paltry 11.1%, including 2021. That means the 10-year performance would have been negative except the industry regained some lost ground in 2021. The 10-year gain for the tech sector was 472.2%, a stunning 42 times better than energy.

Calls for punishing one industry for a short spurt of profitability begin to look inherently ridiculous when the industry is a dog over a longer period of time. There’s high inflation in a lot of things consumers buy, besides gasoline: cars, food, appliances, rent. But nobody’s trying to punish General Motors or Walmart or Maytag for those high prices.

In part that’s because those firms have to eat some of the higher costs they face instead of passing them fully along to consumers. But those firms may also have better luck keeping prices up when their costs decline. Gasoline is different because one component—oil—accounts for more than half the cost, which means price hikes in the core mineral flow through to consumers rapidly. But gas prices also plunge when oil prices drop. That won’t happen with the cost of SUVs or dishwashers.

There are many problems with capitalism, which rewards capital over labor and lacks proven mechanisms for spreading wealth fairly. But the profit motive still generates profound efficiencies that help raise living standards and make the U.S. economy highly productive. Selectively dismantling those incentives, to address the rising cost of one product, gasoline, could have the unintended effect of driving investors away and depressing production, because it’s harder to make money.

Lashing oil CEOs for price increases they don’t really control is one of those theatrical performances some politicians excel at. It would make more sense to accelerate permitting, speed the development of fossil-fuel alternatives and encourage conservation until the market sorts itself out, more supply gradually arrives and prices drift down. Until then, plug your ears every time some loudmouth calls for a windfall tax.

Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.

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